Can a carbon permit system reduce Spanish unemployment?

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Summary

This paper analyses the impact of carbon policy on unemployment in Spain
and whether recycling the public revenues earned from permit auctions can
alleviate this problem. While Spain’s deviation from the European Union’s
intermediate emission goals is more serious than most other member
countries' unemployment in Spain is also well above average for the
European Union. We use a computable general equilibrium model that
includes unemployment in the markets for unskilled and skilled labour. We
find that introducing carbon permits does not aggravate Spanish
unemployment. In fact, if supplied with revenue recycling schemes,
unemployment rates may actually fall. Contrary to other European studies,
we find that the best option is to reduce payroll taxes on relatively
skilled types of labour. This reform is successful in both increasing
labour demand and dampening the supply response to rising wages. However,
while all of the recycling schemes generate dividends in terms of
aggregate welfare, none entirely offsets the abatement costs.